Euro sluggish as EU summit looms large, expectations low

SYDNEY (Reuters) - The euro stayed on the backfoot in Asia on Thursday, though its downside was seen limited lest an impending summit of European leaders surprised markets with concrete measures to tackle the region’s debt crisis.

The map of Europe is featured on the face of a one Euro coin seen in this photo illustration taken in Paris, January 31, 2012. REUTERS/Mal Langsdon

The single currency bought $1.2474, versus $1.2466 late in New York, still within easy reach of this week’s trough around $1.2441. It remained off a high of $1.2748 set early last week.

Against the Australian dollar, the euro plumbed a near four-month low at A$1.2352. On the yen, it bought 99.45, not far off a two-week trough of 98.74 set earlier in the week.

“While we do not expected any material developments out of the euro zone summit, we caution that because of the increasingly low expectations surrounding the meetings, a small bit of positive news could go a long way for the euro in the short-term,” said Christopher Vecchio, currency analyst at DailyFX.

“As leaders convene in Brussels...trading should be largely dependent on headlines rather than fundamentals or technicals, and as such, volatility should be high.”

The first press conference is scheduled at 2000 GMT, after a working dinner, BNP Paribas analysts said.

Further dimming expectations of any breakthrough at the talks, German Chancellor Angela Merkel on Wednesday brushed aside increasingly shrill calls from Spain and Italy for emergency action to lower their soaring borrowing costs.

European Union leaders go into the two-day meeting more openly divided than at any time since the debt crisis erupted in Greece in 2010 and spread over the euro zone.

With the euro floundering, the dollar index .DXY touched a two-week high at 82.699. The greenback also held on to most of its overnight gains on the yen to stand at 79.75. However, that still left it lower on the week following Monday’s near 1 percent slide.

The U.S. dollar was also softer on the Australian currency, which edged up to $1.0086, still trying to recover from last week’s drop from above $1.0200. Strong resistance is seen around $1.0130, a level representing the 61.8 percent retracement of its recent decline.

“We continue to prefer positioning for a weaker USD in response to a slight positive surprise (at the summit),” said analysts at BNP Paribas, adding they were staying long NZD/USD position, targeting $0.8200 from $0.7780.

Markets will also be keeping a close eye on the outcome of an Italian bond sale. Italy will test market appetite with up to 5.5 billion euros of five- and 10- year bonds on Thursday.

It’ll probably have to pay dear to get the bonds away even though demand is expected to be supported by domestic investors.